Business Interruption Claims in a ‘Pandemic Economy’

Natural Disasters and Claims Submission Best Practices

This article’s purpose is to alert practitioners to potential issues that may arise during the claims process as it relates to damages suffered from a catastrophic event, other than COVID-19, during the ‘pandemic economy. Readers need to be aware of and distinguish the two events when filing a claim. Because the influence of the ‘pandemic economy’ on businesses is ongoing, and in many instances specific to industries and geographic locations, practitioners need to be able to isolate the financial components of each and be prepared to articulate if and how the coronavirus impact translates into the impact from another disruptive event.

A quick Google search using the term ‘business interruption’ unlocks a vast array of information defining the term, as well as a host of articles on business interruption insurance. The search reveals that the number of articles published on the subject matter increased due to the novel coronavirus and the impact felt by businesses across America in 2020. However, as business owners in Louisiana recently found out, business interruptions are still caused by natural disasters or fires.

This article’s purpose is to alert practitioners to potential issues that may arise during the claims process as it relates to damages suffered from a catastrophic event, other than COVID-19, during the ‘pandemic economy’.[1] Readers need to be aware of and distinguish the two events when filing a claim. Because the influence of the pandemic economy on businesses is ongoing, and in many instances specific to industries and geographic locations, practitioners need to be able to isolate the financial components of each and be prepared to articulate if and how the coronavirus impact translates into the impact from another disruptive event.

Over the course of the last 18 months, financial and valuation practitioners have written and spoke on the impact of COVID-19 to businesses. The results have identified businesses and industries who fared better than previously imagined, new businesses being borne from the pandemic and consumer needs, enhancement of traditional business practices and a rethinking of the way businesses serve their customers. Business is and will continue to change at a faster rate because of the constraints and opportunities presented by the pandemic. That is important for practitioners to recognize.

Typically, practitioners would perform a ‘before and after’ analysis or a market share method. However, with the change in business lifecycles, practitioners are left wondering how the prior 18-month period (i.e., pandemic period) impacts their analysis. Questions practitioners may want to consider include:

• Are the prior 18 months a financial representative of permanent or temporary change?
• Does the subject company expect a permanent or temporary change in operations and, if so, how does operations (costs) impact the current and future business model?
• What financial components embedded in historical information are relevant when comparing the current period?
• Has the disruption to operations been felt by COVID-19 and another external factor?

Distinguishing between permanent and/or temporary changes that resulted from a causality-linked event could considerably affect a practitioner’s analysis. In determining losses, the practitioner should consider what constitutes ‘normal’ operations and finances. A determination needs be made if any divergences from this norm are permanent or temporary to ensure proper accounting of the event. Do these seemingly onetime events require normalization or are they part of a new company norm? Communication with the client throughout the course of the engagement is necessary for a full understanding of past events, current practices, and future business plans.

Historical and possible future transformations in response to the pandemic are key components in quantifying the impact from other business interruptions. A practitioner needs to understand the evolution of an entity and its industry in this new era to isolate its effect from the separate and distinct event being examined. For example, those affected by Hurricane Ida have also had to endure the sudden impact of the pandemic. For the last 18-months, those in Louisiana have had to adapt, grow, and change to a very different economy in which supply and demands shifted in, what seemed like, overnight. Losses from the interruption of normal business operations may be overstated should the impact of COVID-19 not be considered and adjusted accordingly. This ‘double-dip’ results in a misrepresentation of the event which could adversely affect the client.

My concerns and the purpose of this article is to alert fellow practitioners working in this arena to be cognizant of the pandemic impacts when calculating business interruptions for events that have occurred during the pandemic economy. I can foresee an array of issues wherein claims are made that may have a double-dip component in that losses incurred are inclusive of the pandemic economy. This may be troublesome for clients and is something we as a profession should be aware of and prepared to address during analysis. Another scenario is where practitioners include negative pandemic impacts within their historical analysis without addressing if such impacts are permanent or temporary. Get ready for a bumpy ride. I foresee this causing many sleepless nights for practitioners as they deal with business interruption claims moving forward.

[1] I would like to acknowledge Melissa Gragg, CVA, MAFF, CDFA, for informing me of the term ‘pandemic economy’.

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Joshua Shilts is president of Shilts CPA, PLLC. Mr. Shilts’ practice is focused on assisting attorneys, individuals and businesses with complex financial matters and disputes. He has held roles with international consulting and public accounting firms in Miami and New York City as well as positions with large public organizations. Mr. Shilts is a frequent lecturer on a variety of forensic accounting matters. He has been involved with hundreds of forensic investigations dealing with a variety of matters involving personal and business disputes as well as the identification and mitigation of fraudulent activities. Clients have sought Mr. Shilts’ advice and services because of his unique industry experience and knowledge.

Mr. Shilts has provided expert testimony in commercial and family matters surrounding business valuation, economic damages, fraud, and other applicable disciplines surrounding economic and accounting issues. He has been qualified as an expert and testified in State and Federal courts.

Mr. Shilts can be contacted at (844) 850-6166, ext. 101, or by e-mail to Josh@shiltscpa.com.

Melissa Deighan resides in Jacksonville, FL and holds a Bachelor’s in Accounting from the University of North Florida and a Master of Science in Forensic and Fraud Detection from the West Virginia University. She is a Certified Public Accountant (CPA) candidate, and, upon graduation, she will be sitting for the CPA and the Certified Fraud Examiners (CFE) exams. She has over 14 years of experience in the accounting field, having moved her way up from an accounting clerk position to Senior Staff Accountant to her current role as Forensic and Valuation Associate II. 

Ms. Deighan can be contacted at (844) 850-6166, ext. 102, or by e-mail to Melissa@shiltscpa.com.